Chapter 13 Bankruptcy Can Save Homes
The collapse of the U.S. housing market spawned a nationwide wave of mortgage foreclosures.
Some homeowners were caught up in the boom in the late 1990s and bought homes they couldn’t afford by taking on risky loans; others cashed in on the increased equity of their homes without foreseeing the dangers ahead.
Many homeowners took adjustable rate mortgages (ARMs) that started out at a low teaser rate, but were scheduled to reset to a much higher interest rate after two years.
The Fall Out
Subprime mortgage brokers assured homeowners that the market was strong and they’d be able to refinance before their loans reset; but then the bottom fell out.
Soon, millions of homeowners found themselves facing the reality of losing their homes to foreclosure.
Some homeowners have found that they’re able to keep their homes by filing Chapter 13 bankruptcy.
The Protection of Bankruptcy
When a bankruptcy petition is filed, the bankruptcy court typically issues an automatic stay, which stops all collection actions, including wage garnishments, repossession and foreclosure.
Under Chapter 13, debtors with a regular income may reorganize debts under a three- to five-year repayment plan. This can allow time for the debtor to regain control of finances and pay down old debt.
Under the repayment plan, debts are consolidated and one monthly payment is made to a bankruptcy trustee who then distributes payment to creditors.
If all payments are made on time, the remaining balance of the debtor’s unsecured debts may be discharged (eliminated!).
Loan Modification Legislation Could Also Help Save Homes
Unfortunately, many homeowners don’t know how Chapter 13 could help them avoid foreclosure or they find out too late.
According to statistics from the Mortgage Bankers Association, every three months 250,000 homeowners face foreclosure.
But many homeowners may soon receive additional assistance through Chapter 13 bankruptcy.
A new bill currently making its way through the approval system is especially important because it would give bankruptcy judges the power to restructure mortgages.
Mortgage loans are one of the few types of contracts bankruptcy judges don’t currently have the authority to revise.
This bill could change that and give millions more the opportunity to save their homes.